US government tries to block AT&T and T-Mobile merger

Jan Dawson, Chief Telecoms Analyst, Ovum.

AUSTRALIA: At the very least, this will now create a massive uphill battle for AT&T in consummating its merger, and will create significant delays. At worst, it will prevent the merger from happening entirely, which will result in a massive breakup fee of several billion dollars and various other concessions on the part of AT&T.

The uncertainty created in the meantime poses several very difficult decisions for AT&T, especially in terms of network investments. It will have to decide whether to press ahead with its own LTE rollout on the assumption that T-Mobile's network assets and spectrum will eventually be part of it, or whether to pursue another strategy for rolling out 4G.

All this is happening at precisely the time when AT&T needs to accelerate its 4G rollout to keep up with Verizon, Sprint and others who are much further ahead. One option AT&T should immediately pursue is a network-sharing arrangement with T-Mobile along the lines of similar deals we've seen in Europe and elsewhere. This would provide some of the same benefits without raising as many concerns on the part of the federal government, and would arguably have been a better strategy from the outset given the inherent risks involved in such a major acquisition.

The Department of Justice's (DOJ) arguments against the merger have significant merit - T-Mobile has acted as a disruptive competitor in the market, pioneering new service plans and devices and putting significant competitive pressure on the three largest operators. AT&T's intention to acquire T-Mobile was motivated primarily by spectrum and network concerns, but there is no doubt it also would have alleviated that competitive pressure. The DOJ advises AT&T to instead invest in its own network, but it is not clear whether AT&T has all the resources - especially spectrum - in house to do this.

The lawsuit also leaves T-Mobile USA in a difficult position. Although its "4G" rollout has been somewhat successful, it has struggled to differentiate itself since smaller regional competitors began targeting the low-spend and prepaid markets more aggressively on a national basis.

For both T-Mobile USA and its owner Deutsche Telekom, the AT&T merger was a great way out of this difficult situation, providing a big payoff for Deutsche Telekom and a way forward for T-Mobile. Now, Deutsche Telekom faces the prospect of hanging onto its unloved US asset for a while longer with only the breakup fee for comfort, while T-Mobile USA ends up potentially going back to the drawing board for a new strategy.

This is not the first case to be known as United States vs. AT&T - an earlier case in the late 1970s and early 1980s led to the breakup of the then-monopoly AT&T into eight separate companies. AT&T and other companies have been working hard over the last ten years to put many of those pieces back together, beginning with the mergers of Pacific Telesis, Ameritech and Southwestern Bell, and followed by the acquisitions of AT&T, BellSouth and Cingular by SBC.

The fact that the Department of Justice is stepping in now is a sign that it wants to draw a line in the sand and forbid further consolidation among major players in the industry, and especially AT&T.